A session on Russia at the annual World Economic Forum in Davos on Wednesday heard that the Russian Federation faces several negative scenarios, including the potential threat of civil unrest. A straw poll of WEF associates in the audience found nearly 80% saw better governance as Russia's biggest challenge.

Alexey Kudrin, a professor at Saint Petersburg State University, said there were "serious, negative" warnings coming from Russia's business community. He outlined a scenario in which falling oil prices send Russia's budget forecasts off track, forcing the government to hike taxes and slash spending on social programmes, and freezing reform efforts.

From the audience, Russian businessman Oleg Deripaska called for the country's interest rates – currently as high as 8.25% - to be lowered. "Our high interest rates will hamper economic growth, not just for banks but for small firms too."

Officials from the G20 nations, whose leaders are meeting in Mexico next week, said that central banks were ready to take steps to stabilize financial markets - if needed - by providing liquidity and prevent any credit squeeze after Sunday's election. Canada is "ready to act" if the situation takes a serious turn for the worse of there is "an external shock," Andrew MacDougall, a spokesman for Prime Minister Stephen Harper, said on Thursday.

Greek banking stocks soared more than 20 percent on Thursday amid market talk that secret opinion polls were showing that a government favourable to the international bailout agreement was likely to emerge after the June 17 election.

Central bankers are ready to ensure enough cash is flowing through the financial system if severe market strains emerge after the elections in Greece, which coincide with votes in Egypt and France, G20 officials said.

"The central banks are preparing for coordinated action to provide liquidity," said a senior G20 aide familiar with discussions among international financial diplomats.

Britain did not wait for the elections to announce action. Bank of England Governor Mervyn King said the country would launch a scheme to provide cheap long-term funding to banks to encourage them to lend to businesses and consumers.

Faced with Greek defiance, officials said the euro zone would not tear up the main targets of the bailout no matter who wins the elections, but it might consider giving a new government in Athens some leeway on how it reaches them.

One euro-zone official said that the main concern, if SYRIZA overwhelmingly won the election, was the risk of large capital outflows from Greece if depositors worry their savings in euros could later be frozen or converted into new drachmas.

"It is not even about a bank run on Monday morning after the elections. People can now log on to Internet banking and make transfers on Sunday evening as well," an official said, explaining the rationale of the ministerial call.

Visiting Rome, Hollande called for the euro zone to adopt bold new mechanisms to insulate member states and their banks from market turmoil, such as a joint fund to pay down debt, putting him on a collision course with Berlin.

"We need imagination and creativity to find new financial instruments," Hollande told a news conference. "To deepen financial union, there are many options such as a financial transactions tax and joint debt issuance, including euro bonds, euro bills or a debt redemption fund."

However, Merkel rejected "miracle solutions" such as issuing joint euro bonds or creating a Europe-wide deposit guarantee scheme. Such proposals were "counterproductive" and would violate the German constitution, she told parliament.

He said the underlying problem which needed to be addressed was the architecture of the euro. There was a single currency, but "no unified banking system, no common fiscal policy, and different labour laws and pension systems".

European banks are the biggest lenders to EU governments. The guarantee scheme would reduce banks' risk from lending to indebted governments such as Portugal.

So indebted governments could benefit from artificially low borrowing costs by piggy-backing loan guarantees from Germany without addressing their underlying economic problems.

For that reason, Sabine Lautenschlaeger insists that banking union should go hand-in-hand with fiscal union to ensure all EU governments adhere to strict budget policies. And that insistence could stall the whole banking union process.

Being in the euro helped Germany become more productive relative to its southern neighbors. If Germany still had a deutschmark, the discipline of its businesses would have been rewarded by a relative increase in its value, thereby limiting the disparity between Germany and other countries. Germany would not, therefore, have experienced to such a degree the low unemployment and healthy growth that its voters have gotten used to. In turn, this would have tempered the flow of German funds recycled southwards as investments in Greek, Spanish, and other assets, reducing the bubble pressure on Club Med asset prices.

Breaking up the euro, whether by Greece and Spain or by Germany, could at a stroke eliminate those productivity advantages and possibly stall the German economy. It could also instantly crystallize losses on assets held by German savers in Club Med bonds and loans, probably necessitating an immediate capitalization of the German banking system. In other words, the problems currently being experienced in the South would get transferred to the North.

it's easy to see why German politicians might be hesitant to actually take the initiative on breaking up the euro. Reviving the deutschmark will involve certain and immediate pain for German voters. Muddling through might cushion that pain by leaving more of it with other electorates and enable German voters to blame the policies and work-cultures of Southern Europe.

China will set a $10 billion credit line and a $500 million investment fund dedicated to eastern and southern European states as it aims to increase trade with the region to $100 billion in 2015, Premier Wen Jiabao said on Thursday.

Earlier this week Wen also promised to increase bilateral trade volumes with Germany [ID:nW8E7KD00A] and Poland [ID:nL5E8FOFAP] as part of a drive to diversify its foreign currency reserves, the world's largest at $3.3 trillion.

Poland, the largest eastern EU member and still outside the single currency area, is engaged in a large-scale infrastructure building programme and struggling to modernise its energy sector to curb reliance on highly polluting coal.

Warsaw hopes for Chinese investments in those fields.

China is interested in Poland's banking sector and wants to open branches of its banks, including Industrial and Commercial Bank of China, its biggest lender, in Poland.

"We are pleased that Poland today is China's largest partner in central Europe, with trade volumes exceeding 14 billion euros in 2011," said Polish Prime Minister Donald Tusk, adding that the potential for trade between China and Poland and its regional peers was much bigger.

The poll also showed that a majority of those surveyed favour smaller budget cuts than those stipulated by the European Union, a further sign that the notoriously frugal Dutch are suffering from "bailout fatigue" and resent the high cost of rescuing profligate peripheral euro zone countries.

"Voters from different parties share the same view - disgust or disappointment over the political action and the political parties," De Hond said in a statement, adding that two thirds of those polled agreed with the statement "I'm tired of all the party politics".

Annual budget cuts of 14 to 16 billion euros are needed for the Netherlands to meet European Commission targets. Without them, its public deficit is forecast to hit 4.6 percent of GDP in 2013, well above the 3 percent agreed with the Commission.

The catalyst for the crisis was Geert Wilders, whose anti-euro, anti-Islam Freedom Party had pledged to support the minority government in parliament and give it the majority to pass legislation.

But after seven weeks of talks, Wilders suddenly backed out just when a deal appeared close.

Wilders' supporters are against budget cuts, particularly cuts in welfare, health and unemployment benefits, and there was talk, which he denied, that the Freedom Party was split over the proposed cuts.

"We don't want to make our pensioners bleed for the sake of diktats from Brussels," Wilders told reporters on Saturday.

"This was a package that would damage our economy over coming years and increase unemployment. And all that to meet a demand made by Brussels, accepted by the Liberals, of reaching a 3 per cent deficit in 2013."

Army chief Ataollah Salehi said the United States had moved an aircraft carrier out of the Gulf because of Iran's naval exercises, and Iran would take action if the ship returned.

"Iran will not repeat its warning ... the enemy's carrier has been moved to the Sea of Oman because of our drill. I recommend and emphasise to the American carrier not to return to the Persian Gulf....we are not in the habit of warning more than once," he said.

After years of measures that had little impact, the new sanctions are the first that could have a serious effect on Iran's oil trade, which is 60 percent of its economy.

Sanctions signed into law by U.S. President Barack Obama on New Year's Eve would cut financial institutions that work with Iran's central bank off from the U.S. financial system, blocking the main path for Iran to receive payments for its crude.

Even Iran's top trading partner China - which has refused to back new global sanctions against Iran - is demanding discounts to buy Iranian oil as Tehran's options narrow. Beijing has cut its imports of Iranian crude by more than half for January.

Experts still say they do not expect Tehran to charge headlong into an act of war - the U.S. Navy is overwhelmingly more powerful than Iran's sea forces - but Iran is running out of diplomatic room to avert a confrontation.

"I think we should be very worried because the diplomacy that should accompany this rise in tension seems to be lacking on both sides," said Richard Dalton, former British ambassador to Iran and now an associate fellow at Chatham House think tank.

"I don't believe either side wants a war to start. I think the Iranians will be aware that if they block the Strait or attack a U.S. ship, they will be the losers. Nor do I think that the U.S. wants to use its military might other than as a means of pressure. However, in a state of heightened emotion on both sides, we are in a dangerous situation."

The new U.S. sanctions law, if implemented fully, would make it impossible for many refineries to pay Iran for crude. It takes effect gradually and lets Obama grant waivers to prevent an oil price shock, so its precise impact is hard to gauge.

The European Union is expected to consider new measures by the end of this month. The sanctions would halt purchase of Iranian oil by EU members such as crisis-hit Greece, which has relied on easy financing terms offered by Tehran to buy crude.

Although China, India and other countries are unlikely to sign up to any oil embargo, tighter Western sanctions mean such customers will be able to insist on deeper discounts for Iranian oil, reducing Tehran's income.

Beijing has already been driving a hard bargain. China, which bought 11 percent of its oil from Iran during the first 11 months of last year, has cut its January purchase by about 285,000 barrels per day, more than half of the close to 550,000 bpd that it bought through a 2011 contract.

The impact of falling government income from oil sales can be felt on the streets in Iran in soaring prices for state subsidised goods and a collapse of the rial currency.

The economic impact is being felt ahead of a nationwide parliamentary election on March 2, the first vote since a disputed 2009 presidential election that brought tens of thousands of Iranian demonstrators into the streets.

Jonathan Levy, one of the protest organisers, told the BBC: "All the non-rich people in Israel, no matter if they're secular or religious, old or young, realise that we've abandoned some really important battlefields in this country, that is economy, and we only dealt obsessively with security problems."

A busted bubble led to a massive Keynesian stimulus that averted a much deeper recession, but that also fueled substantial budget deficits. The response – massive spending cuts – ensures that unacceptably high levels of unemployment (a vast waste of resources and an oversupply of suffering) will continue, possibly for years.

even as Europe’s leaders promised that help was on the way, they doubled down on the belief that non-crisis countries must cut spending. The resulting austerity will hinder Europe’s growth, and thus that of its most distressed economies: after all, nothing would help Greece more than robust growth in its trading partners. And low growth will hurt tax revenues, undermining the proclaimed goal of fiscal consolidation.

The ECB argued that taxpayers should pick up the entire tab for Greece’s bad sovereign debt, for fear that any private-sector involvement (PSI) would trigger a “credit event,” which would force large payouts on credit-default swaps (CDSs), possibly fueling further financial turmoil. But, if that is a real fear for the ECB – if it is not merely acting on behalf of private lenders – surely it should have demanded that the banks have more capital.

the extreme right threatened to shut down the US government, confirming what game theory suggests: when those who are irrationally committed to destruction if they don’t get their way confront rational individuals, the former prevail.

with housing prices continuing to fall, GDP growth faltering, and unemployment remaining stubbornly high (one of six Americans who would like a full-time job still cannot get one), more stimulus, not austerity, is needed – for the sake of balancing the budget as well. The single most important driver of deficit growth is weak tax revenues, owing to poor economic performance; the single best remedy would be to put America back to work. The recent debt deal is a move in the wrong direction.